POC, value area and the shape of a session

A volume profile is a histogram of volume by price. Take every print of a session, sort by price, and draw a horizontal bar whose length is the volume at that price. Turn the result sideways and you have a profile. It is the auction's record of where business was done, and three features of it (point of control, value area, and overall shape) are used constantly in the rest of this course.

Building a profile

Here is a full session compressed to 0.50 increments. Volume in contracts.

  Price   | Volume  | Profile
  --------+---------+------------------------------------------
  5012.00 |    340  | ###
  5011.50 |    520  | #####
  5011.00 |    910  | #########
  5010.50 |  1,480  | ###############
  5010.00 |  2,260  | #######################
  5009.50 |  3,120  | ###############################
  5009.00 |  3,940  | ########################################  <- POC
  5008.50 |  3,510  | ###################################
  5008.00 |  2,870  | #############################
  5007.50 |  2,050  | #####################
  5007.00 |  1,320  | #############
  5006.50 |    760  | ########
  5006.00 |    410  | ####
  5005.50 |    180  | ##
  --------+---------+
  Total   | 23,670  |

Point of control

The POC is the price with the most volume: 5009.00 with 3,940 contracts. It is the price at which the most business was done, the auction's best estimate of fair value for that session. Price tends to return to the POC while the session is in balance and tends to move away from it decisively when the session is in imbalance.

The POC is a fact about the past. It is useful because participants remember where they traded and because the heavy volume there means many positions were opened there. It is not a magnet with any physical force, and once the auction leaves balance the POC stops mattering until price comes back to it.

Value area

The value area is the range of prices containing a fixed share of the session's volume, by convention 70%, built outward from the POC. To compute it:

Start at the POC (3,940).
Add the larger of the two neighbouring levels, then repeat, always adding the larger unincluded neighbour, until the total reaches 70% of session volume.

70% of 23,670 = 16,569.

Step	Add	Running total
Start	5009.00: 3,940	3,940
1	5008.50: 3,510	7,450
2	5009.50: 3,120	10,570
3	5008.00: 2,870	13,440
4	5010.00: 2,260	15,700
5	5007.50: 2,050	17,750

Reached 16,569 after step 5. Value area: 5007.50 to 5010.00. Value area high (VAH) 5010.00, value area low (VAL) 5007.50, POC 5009.00.

Platforms compute this automatically. Doing it once by hand fixes the idea: value is where 70% of the trading happened, and the edges of value are where the auction started to lose two-sided interest.

Key idea: POC is where the most business was done. The value area is where 70% of it was done. Inside value the market is negotiating; outside value it is either searching or being rejected.

The shape

The profile above is a bell: fat in the middle, tapering to both ends. That is the signature of a balanced session. The auction found buyers below and sellers above and rotated between them. Other shapes mean other things:

  Bell (balance)      P-shape               b-shape              Thin / elongated
                                                                  (imbalance)
  #####                ############          ####                 ##
  ##########           ##############        ######               ###
  ##############       ##########            ########             ##
  ##########           ####                  ############         ###
  #####                ##                    ##############       ##
                       #                     ##########           ###
                                             ####                 ##
                                                                  ###

Bell: balance. Fade the extremes back to POC while it holds.
P-shape: heavy volume at the top after a rise. Often short covering: sellers who were wrong bought back, building value high. Bullish while it holds; if the fat part fails, the buyers who built it are trapped.
b-shape: heavy volume at the bottom after a fall. Long liquidation. The mirror case.
Thin, elongated: a trend day. No price attracted much two-sided trade; the auction spent the day searching. Profile levels are weak until the market stops.

Shape is the fastest read a profile offers. Before looking at any specific level, look at the shape and say which of the four it is.

Where the close sits

The close relative to value is the last piece of the daily read.

Close location	Read
Inside value, near POC	Balance accepted; expect rotation to continue
Inside value, near VAH	Buyers slightly ahead, but no breakout
Above VAH	Late buyers accepted higher prices; watch whether tomorrow opens above or below
Below VAL	Late sellers accepted lower prices
At the extreme high or low	Trend day finished at its extreme; unfinished, likely to continue or gap

Module 6 uses the previous session's POC, VAH, VAL and close location as the core of pre-market preparation. Everything there depends on the vocabulary here.

Try it: Take any session's profile on your platform and switch off the automatic value area. Using the volume numbers, compute the 70% value area by hand with the procedure above. Compare with the platform's. Then describe the shape in one of the four words and state where the close sat relative to value.

Recap

A volume profile is a histogram of volume by price for a chosen period.
The POC is the price with the most volume: the session's centre of fair value.
The value area holds 70% of volume built outward from the POC; VAH and VAL are its edges.
Profile shape (bell, P, b, thin) is the fastest read: it tells you whether the session was balance, covering, liquidation or trend.
Where the close sits relative to value sets up the next session.